Thursday, January 31, 2008

Survival Gear for a Recession

In perhaps its most extraordinary monetary action ever, the Federal Reserve lowered interest rates 125 basis points over the last two weeks. Either there really is a serious chance of a recession, or Wall Street has flimflammed the Fed big time. We'll assume, for the purposes of discussion, that it's the former.

To prepare for a recession, you should think about the following.

Love cash. Everyone likes cash, but usually because they can use it buy something. To prepare for a recession, you should love cash. Save up as much as you can and keep a tight grip on it. Feel really bad about parting ways with your greenbacks. An emergency fund of 3 to 6 months of living expenses is a good idea, and the idea gets better the bigger the emergency fund is. Emergency money should be kept in a safe place like a federally insured bank or credit union account, or a money market fund that invests only in U.S. Treasury securities. (For ideas about where to invest short term money, see As you face the cold winds of recession, grace under pressure is a lot easier when you have a pocket full of cash.

Hate debt. While you're still employed, don't take on any new or increased debt, and start paying down everything except the big ticket items that you can't pay down (like the mortgage). Begin with high interest rate debt like credit cards. Not only does this eliminate excessive interest charges, but it also increases a line of credit you could tap into if you're laid off. Just as Demon Rum has ruined many lives and relationships, Devil Debt can do and has done the same.

Deal with important medical issues. If you have important medical problems, deal with them while you're still employed and have health insurance coverage. While many people who are laid off can continue their health insurance coverage under COBRA, they have to pay the full cost of the premiums. And some employees don't have COBRA rights. The worst case scenario would be the employer going into bankruptcy and terminating its health insurance plan altogether. In that case, COBRA rights disappear because there is no health insurance plan they fall under. This maneuver is very nasty. But it has been done, so don't take anything for granted, especially if your employer is teetering on the brink. If you lose health insurance coverage or don't have it, there are resources you can use to look for coverage. See

Keep saving for retirement. Unless you lose your job, keep saving for retirement. If you do lose your job, your retirement savings program will necessarily stop. You should boost your own personal safety net while you can. You don't want your retirement to be one long recession.

Mortgage Default. If you run into trouble with paying your mortgage, either because the monthly payments increase or you lose your job, there may be ways to get help. Nonprofit organizations sometimes provide assistance, as do various state and local governments. There is a federally sponsored ARM rate freeze that will help some, but probably not all that many, borrowers. Of course, you should try to negotiate with the lender as best as you can. For more information, see

Job loss. If you lose your job, the recession becomes a depression for you. You should still make the most out of the situation. Negotiate for the best termination benefits you can get. Your employer may have a formula such as a week's salary for each year of employment. In addition to that, ask for any commissions, awards and bonuses you've earned or been given. Also ask for payment for unused vacation and sick days. Get what you can from any stock options or restricted stock you hold. Continue your health insurance coverage under COBRA if you can. Apply for unemployment compensation if you qualify. For more details, see

Evidently, most of us will be getting rebate checks from the federal government some time in 2008. This makes for passable political theater. But it has little to do with economic security. If you want to survive a recession, rely on yourself.

Hope springs eternal: 92-year old legally blind golfer gets hole-in-one.

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